Twila E. Palmer's Blog
If your wealth is tied up in your home, how can you free up some cash? A reverse mortgage is available to homeowners with mostly or fully paid-off mortgages. The monthly payments, which come from the lender to you, are not counted as taxable income. But there are mortgage taxes, and interest rates on reverse mortgages are somewhat higher than the current rate for a normal mortgage.
The FHA's Ever-Popular Reverse Mortgage Offering
Are you 62+? Consider the home equity conversion mortgage, available through the FHA. An approved counselor will lay out the process and point you to a qualifying lender.
Then, here's what you should expect:
- There are initial and annual fees, as well as recording fees.
- Expect credit checks.
- And yes, you do need an appraisal, inspection and a title search.
- In contrast to the usual custom with a regular mortgage, as the AARP points out, you'll probably have to pay the home insurance and local property taxes yourself.
The more you borrow, and the longer the term of your loan, the heftier cumulative interest charges you'll pay.
The Other Ways to Get to Your Home Equity
Of course, you might sell and downsize. Not ready for that move? Think about...
If your credit score is 640 or above and you have a mortgage, consider cash-out refinancing with the FHA. This replaces your present mortgage with a larger one. The larger loan pays off your mortgage, replaces it and gives you the extra funds in a lump sum. You can be younger than 62.
The Private Reverse Mortgage
Put up your home as collateral and enter a loan agreement with a close friend or relative. It's not altogether "private" — private reverse mortgages have a standard interest rate, governed by the IRS — but the rate is lower than a bank's.
A home equity line of credit (HELOC) empowers you to tap into your home equity. It's something like a credit card: there's a set credit limit. You only need to pay interest on what you withdraw. Note that HELOCs do not come with fixed interest rates.
The Home Equity Loan
An alternative to the reverse mortgage that can work when you need cash upfront is the home equity loan. You'll pay interest on the lump-sum amount.
Best of Luck (and Patience)!
If there's one thing you must have before applying for a reverse mortgage, it's patience. A reverse mortgage, like a conventional mortgage, involves a full approval process, including those pesky calls and queries about proof of your capacity to repay the loan.
But the result can make it all worthwhile.